Signs emerge of new­found yuan sta­bil­ity

A lit­tle less than a year after buy­ing a small apart­ment in Hong Kong, Liu Fangfei is breath­ing eas­ier, but not be­cause home prices have moved higher in the spe­cial ad­min­is­tra­tive re­gion or that she has made any kind of for­tune flipping real es­tate.

No, Liu is breath­ing eas­ier be­cause the funds used for her pur­chase were yuan-de­nom­i­nated sav­ings that she and her par­ents had held.

“If I had waited, we would have lost a lot,” she said. “We saved a lot of money by buy­ing the apart­ment.”

The Chi­nese cur­rency has de­pre­ci­ated around 4.5 per­cent since Jan­uary when one US dol­lar could buy 6.5 yuan. As of Nov 9, the same dol­lar was fetch­ing al­most 6.8 yuan.

Liu and hun­dreds of thou­sands like her who parked their yuan sav­ings in Hong Kong real es­tate, and the tens of mil­lions on the Chi­nese main­land who have taken to buy­ing up US dol­lar as­sets an­tic­i­pat­ing an on­go­ing de­val­u­a­tion, have done well thanks to the yuan’s fall in value.

Yuan-de­nom­i­nated de­posits in Hong Kong rose 1.9 per­cent in Septem­ber to the equiv­a­lent of $98.28 bil­lion, ac­cord­ing to lat­est fig­ures from the Hong Kong Mon­e­tary Author­ity. Yuan de­posits ac­count for 6.6 per­cent of all de­posits in Hong Kong. The Septem­ber in­crease was some­thing of a sur­prise after a long string of steady de­clines.

In De­cem­ber 2014, there was slightly more than 1 tril­lion yuan de­posited in Hong Kong bank ac­counts. Christo­pher Bald­ing, an as­so­ciate pro­fes­sor of eco­nomics at Peking Univer­sity HSBC Busi­ness School in Shen­zhen in South China’s Guang­dong prov­ince, be­lieves that was when yuan de­posits peaked. By Au­gust 2016, the fig­ure had dropped to 653 bil­lion yuan.

“It is very dif­fi­cult for RMB as­sets to grow very much if the RMB price fol­lows the off­shore RMB lower,” Bald­ing told China Daily.

“The off­shore RMB is al­most al­ways trad­ing at a not in­signif­i­cant dis­count against the on­shore RMB.”

The value of the yuan against the US dol­lar has been de­clin­ing since early 2014. In Jan­uary of that year, one dol­lar was buy­ing just over 6 yuan. Over the last cou­ple of years, the Chi­nese cur­rency has dropped as much as 12.5 per­cent.

One tell-tale sign is the price of dig­i­tal cur­rency Bit­coin, which roughly tracks the price of the yuan against the dol­lar. As the value of the yuan drops, de­mand for Bit­coin in­creases.

Bit­coin is of­ten used as a way to move cur­rency out of China. And the price for the cryp­tocur­rency topped $600 in Oc­to­ber, dou­bling from early 2015.

This drop in the value of the yuan has gen­er­ated some con­cerns among in­vestors that Chi­nese com­pa­nies with dol­lar loans might get into trou­ble as those pay­ments be­come more ex­pen­sive. But there has been lit­tle fall­out to date and the down­ward trend could start to re­verse over the next year or so.

Ear­lier this year, Citi, the US­head­quar­tered fi­nan­cial ser­vices firm, an­tic­i­pated that the yuan would hit 6.8 to the dol­lar within 12 months. It is al­ready there, but the risk of a large and sur­pris­ing de­val­u­a­tion is much smaller than it once was.

Not only that, but the longterm trend in the value of the yuan against other cur­ren­cies could start to turn as China’s eco­nomic growth sta­bi­lizes, per­haps around the 6.5 per­cent rate.

One sign of the yuan’s new­found sta­bil­ity is Citi’s plan to in­clude Chi­nese govern­ment bonds in its World Govern­ment Bond In­dex, per­haps some­time next year. The bank would give Chi­nese bonds a weight of around 4.6 per­cent in the in­dex.

Bond funds that track the in­dex would then buy into Chi­nese govern­ment bonds, and that should trans­late into a cap­i­tal in­jec­tion of $100-150 bil­lion. While not a huge in­jec­tion, this is an­other sign that the yuan, and yuan-de­nom­i­nated prod­ucts, are now a per­ma­nent fix­ture of global fi­nan­cial mar­kets.

Even as the yuan has dropped in value, China has un­der­taken a big push to ex­pand the cur­rency’s use around the world. A se­ries of mea­sures has made it much eas­ier to set­tle trade pay­ments us­ing yuan, but the aims of im­porters and ex­porters are dif­fer­ent.

“Chi­nese im­porters are will­ing to pay in RMB but Chi­nese ex­porters want to be paid in US dol­lars,” Bald­ing of the HSBC Busi­ness School ex­plained. “They have made it eas­ier to in­vest from abroad into Chi­nese fi­nan­cial as­sets.”

With­out doubt, the yuan is in much wider use to­day than it was just a few years ago.